If a Loss Contingency Related to a Lawsuit Against a Firm

question 6

Multiple Choice

If a loss contingency related to a lawsuit against a firm is deemed to have a high probability of requiring ultimate payment and can be reasonably estimated, then the proper accounting treatment of the loss contingency will

• A)decrease the debt/equity ratio.
• B)decrease the debt/asset ratio.
• C)decrease earnings per share.
• D)increase net income.

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Definitions:

Freight Costs

Freight Costs entail the charges incurred for the transportation of goods by land, sea, or air.

Perpetual System

A system for managing inventory that instantly logs sales or purchases via computerized point-of-sale systems and enterprise asset management software.

Inventory

A company's complete stock of items and materials, kept for the aim of either resale or use in manufacturing processes.

Sales Discount

A reduction in the price of a product or service offered by a seller to the purchaser, usually provided for prompt payment or in specific situations.